Toxic-debt plan and short-selling curbs lift spirits

LONDON/NEW YORK (Reuters) - The U.S. government launchedseveral multibillion-dollar programs to guarantee holdings inmoney-market mutual funds and curb short-selling whiledeveloping a more sweeping plan to mop up toxic mortgage debt,sending global markets higher on Friday.

Bank stocks around the world rose up to 40 percent asurgent talks over rescue takeovers in the sector continued.

As government authorities brought out the big guns totackle the financial crisis, U.S. investment bank MorganStanley continued talking to Wachovia Corp and other banksabout a merger, while discussing a possible increasedinvestment from China's sovereign wealth fund, sources familiarwith the plans said.

In the most recent example of a government entity steppingin to ease fears, the U.S. Treasury Department said on Fridayit will use $50 billion to back money market mutual funds whoseasset values fall below $1 (55 pence) in another step tocontain raging financial turmoil.

HSBC Holdings walked away from a $6.3 billion (3.5 billionpound) deal for control of Korea Exchange Bank, fuellingspeculation it may be turning its attentions to one of itsembattled rivals in the West instead.

And the Eurozone's largest bank, Spain's Santander,declined to comment on a media report it was eyeing Bank ofIreland, which has been pummelled by a property market slump athome.

After the Financial Services Authority imposed a four-monthban on short selling financial stocks on Thursday, the U.S.Securities and Exchange Commission followed suit on Friday withan immediate 10-day ban. French regulator AMF said it was alsotalking to other Eurozone regulators about market dealings,leading to expectations that the ban would snowball.

Meanwhile the world's central banks redoubled their effortsto lubricate the seized-up money markets. Japan, Australia,India and Indonesia pumped in $42 billion after the U.S. Fedco-ordinated a $180 billion package a day earlier.

In Europe, there were signs that the stress was easing. Thecost of borrowing dollars overnight fell back towards the Fed's2 percent target, and three-month borrowing costs slid. TheBank of England offered $40 billion to banks, but only half ofit was taken up.

TOXIC DEBT PLAN

Thursday's proposals by Washington to draw the poison frombanks' mortgage assets and the first of the short-selling banshad an immediate and dramatic effect.

U.S. stocks clocked their biggest percentage gain in sixyears late Thursday, powering a rally in the dollar and pushingoil prices higher, and on Friday Asian and European marketspicked up where New York's left off.

The price of gold and government bonds, traditional safehavens in times of turmoil, both slipped back.

U.S. Treasury Secretary Henry Paulson and Federal ReserveChairman Ben Bernanke plan to work through the weekend withCongress on a plan to deal with the toxic bank assets that havebeen choking the financial system for a year.

"This is a more substantial and systemic solution than thead hoc interventions we have seen in recent days," said DariuszKowalczyk, chief investment strategist at CFC Seymour in HongKong.

"At present, confidence is the most important factor, andthis will only be maintained if the rescue plans are deliveredon both sides of the Atlantic," said Andrew Turnbull, seniorsales manager at ODL Securities.

The MSCI index of regional shares excluding Japan was up 7percent and Tokyo stocks ended up 3.8 percent. The Shanghaiindex roared 9.5 percent higher after China stepped in with areform package to halt a 69 percent slide from last October'srecord high.

In Europe, all the continent's major markets jumped inearly trade. The pan-European FTSEurofirst 300 was up 6.3percent, while some of Europe's biggest banks, UBS, HBOS,Lloyds TSB and Royal Bank of Scotland were up between 29 and 47percent.

MORGAN STANLEY

Sovereign wealth fund China Investment Corp, MorganStanley's largest shareholder, was in talks that could see itsstake climb to as much as 49 percent from its current 9.9percent that it paid $5 billion for in December, sourcesfamiliar with the matter said.

Beijing is wary of adding to its Morgan Stanley holding,given that its existing holding is carried at a steep loss --the whole bank was only worth $24 billion at Thursday's close.An unidentified CIC official told the Xinhua news agency thatan increase in the stake would face U.S. political obstacles.

Sources familiar with the plans said Morgan Stanley'sparallel discussions with Wachovia began Wednesday night with aproposal from Wachovia CEO Robert Steel to Morgan Stanley CEOJohn Mack and have since reached a more formal stage.

Morgan Stanley declined to say it was in talks, but aspokeswoman confirmed it was "focused on solutions" to addressits falling stock price.

GOVERNMENT ACTION

A U.S. fund to deal with bad mortgage-related assets wouldbe similar to the Resolution Trust Corp, which was set up toclean up bad debts from the savings and loan crisis in the late1980s at a $400 billion cost to taxpayers.

"We talked about a comprehensive approach that will requirelegislation to deal with illiquid assets on financialinstitutions' balance sheets," Paulson told reporters.

According to two Congressional aides, he has been shoppingaround a plan to create the fund.

Rep. Barney Frank, who is chairman of the House FinancialServices Committee, said there was concern that establishing aformal entity to buy the assets would take too long.

"I think it will start to provide a floor to asset valuesand allow institutions to work through this in a systematicmanner. They won't have to rush into the arms of suitors toavoid collapsing," said Haag Sherman, co-founder and managingdirector of Salient Partners in Houston.

In addition, New York's Attorney General Andrew Cuomo begana wide-ranging probe into possible illegal short-selling in thestocks of Wall Street firms such as Morgan Stanley and rivalGoldman Sachs.

(Additional reporting by Kevin Plumberg; Additional writingby Tony Munroe; Editing by Jeff Benkoe, Dave Zimmerman)